November 30, 2023
Good morning,
Let us pause for a moment this morning and bid a fond farewell to November. Thank you Nov-ie, and well done! Recall how it felt limping into this glorious month – leaves were turning, the scent of fall was in the chilly air, markets had been pummeled for three straight months, market psychology was “I give up” depressed, stocks and bonds were oversold, and the best two months of the calendar year were about to begin. The table was set for a rally and for Thanksgiving appropriately enough.
Sentiment and seasonality would normally be enough for some kind of rally. Throw in a steep decline in market yields on the belief that the Fed tightening cycle was over and the commensurate stock rally (as lopsided as it has been to the Mag-7) that has lifted the S&P 500 Index +8.7% with one day left in the month, and we have reason for homage. November appears to have saved the year.
Now what? As mentioned, the technical strength of our month-long rally suggests that it will probably continue through the year-end finish line with some minor pullbacks along the way. However, so far, there is not enough technical evidence to support the notion that the current rally is the resumption of the 13-month old cyclical bull market that may continue deep into 2024.
“Don’t Fight the Fed” is a reliable rule for successful money management. And with many investors believing rate cuts will begin in a matter of months, the rule switches to Align with the Fed, allowing stocks to rally on lower yields. Whether the rate cut expectations get realized in the next few months (I’m in the “no way” camp for what it’s worth), there is another Fed matter beneath recent headlines that may be a headwind for stocks in 2024 – rate cuts or not. It is Fiscal Policy.
In 2020 and 2021, the government injected the most money into the economy since World War II. The fiscal drag in 2022 was a key contributor to the cyclical bear market. An accidental fiscal stimulus in 2023 was part of the reason the market and economy surprised to the upside. The fiscal injection was so large that it more than offset the tighter monetary policy. Real Monetary, Fiscal, and Exchange Rate Policy accelerated at its fastest pace in at least 50 years, excluding the early days of the pandemic (NDR Research). “Accidental” because it did not come from Congress or the President. Instead, it was the combination of one-time fiscal mechanics.
Minus the details of the federal outlays and receipts in 2023, the bottom line is that many of the drivers of the 2023 stimulus are unlikely to continue in 2024. As investors get excited about not fighting the Fed as it transitions to cutting rates next year, they would be wise to not forget another primary Rule, “Don’t Fight Fiscal Policy”.
Be well,
Mike
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